# Portfolio Heat > Portfolio heat is the total amount you would lose if every open position hit its stop. Learn how to calculate it, set limits and adjust for correlation. Source: https://learn.tradelabsai.com/risk/portfolio-heat/ Track: Risk Management · Level: Beginner · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Portfolio Heat", https://learn.tradelabsai.com/risk/portfolio-heat/ Portfolio heat is the total amount of money you would lose if every open position hit its stop loss at the same time. Sizing each trade correctly is the first step in risk management; portfolio heat is the second, because many small, correctly sized positions can add up to a large combined risk. Keeping heat within a limit stops you from becoming overexposed during periods when you find many setups at once. ## How to calculate portfolio heat ``` Portfolio heat = Σ (Risk to stop on each open position) ÷ Account value ``` Risk to stop is the distance from the current price (or entry) to the stop, times the position size. **Example: Adding up open risk** Account $40,000. Open positions: - Stock A: 100 shares, stop $3.00 away, risk $300. - Stock B: 50 shares, stop $6.00 away, risk $300. - Futures trade: risk $400 to stop. - Crypto position: risk $200 to stop. Total open risk = $1,200. Portfolio heat = $1,200 ÷ $40,000 = 3%. If the trader's heat limit is 5%, they have room for about $800 more risk. ## Setting a heat limit | Trader type | Typical maximum heat | |---|---| | Conservative or beginner | 2% to 4% | | Active swing trader | 4% to 8% | | Aggressive trend follower | 8% to 15%, with careful correlation management | The right number depends on how correlated your positions usually are and how much drawdown you can tolerate. A heat limit should be set so that a bad day where most positions stop out is painful but not damaging. ## Heat changes as trades move - **When trades move in your favour** and you trail stops to breakeven or beyond, their risk falls to zero or becomes locked in profit, reducing heat. This frees room for new trades. - **When prices gap,** actual losses can exceed calculated heat, because stops fill at worse prices. Many trend followers only add new positions when existing ones have moved their stops to breakeven, keeping heat in check while pyramiding. See [Scaling In and Pyramiding](https://learn.tradelabsai.com/position-management/scaling-in-and-pyramiding/). ## Adjusting for correlation Raw heat treats every position as independent. If positions are correlated, the effective risk is higher. Practical adjustments: - Count highly correlated positions as one when deciding whether to add more. - Set a separate heat cap per sector, theme or currency. - Use a correlation adjusted measure for larger portfolios. See [Correlation-Adjusted Sizing](https://learn.tradelabsai.com/risk/correlation-adjusted-sizing/). **Example: Correlated heat** Three positions each risking 1% are all long US bank stocks. Raw heat is 3%. A sector cap of 2% would block the third position, because in a bank sell off all three would likely stop out together. ## Heat and other limits Portfolio heat works alongside your other rules: - **Per trade risk** caps each position. See [Position Sizing](https://learn.tradelabsai.com/risk/position-sizing/). - **Daily loss limit** caps realised losses in a day. See [Maximum Trade Risk and Daily Loss Limits](https://learn.tradelabsai.com/risk/daily-loss-limit/). - **Concentration limits** cap exposure to any single asset or sector. See [Concentration Risk](https://learn.tradelabsai.com/risk/concentration-risk/). ## Tracking heat in practice Keep a simple table in your journal or spreadsheet with each open position's size, current price, stop and risk to stop. Update it whenever you open, close or adjust a position. Some platforms calculate it automatically. ## Common mistakes - **Ignoring heat entirely** and opening every valid setup. - **Treating correlated positions as independent.** - **Forgetting that heat changes** as stops are moved. - **Assuming stops limit losses exactly** in gap prone markets. ## Frequently asked questions ### What is portfolio heat in trading? The total percentage of your account at risk across all open positions if every stop were hit. ### What is a good portfolio heat limit? Many traders keep total open risk between 2% and 8% of their account, depending on correlation and experience. ### How do I reduce portfolio heat? Close or reduce positions, move stops to breakeven when trades work, or avoid adding new correlated positions. Next, learn about the risk of putting too much in one place: [Concentration Risk](https://learn.tradelabsai.com/risk/concentration-risk/). ## Continue learning - Next lesson: [Concentration Risk](https://learn.tradelabsai.com/risk/concentration-risk/) - Previous lesson: [Maximum Trade Risk and Daily Loss Limits](https://learn.tradelabsai.com/risk/daily-loss-limit/) - Related: [Maximum Trade Risk and Daily Loss Limits](https://learn.tradelabsai.com/risk/daily-loss-limit/): A daily loss limit stops you trading after a set loss, preventing one bad day from wrecking your account. Learn how to set daily, weekly and per trade limits. - Related: [Position Sizing](https://learn.tradelabsai.com/risk/position-sizing/): Position sizing decides how many shares or contracts to trade so each loss stays small. Learn the formula, worked examples for each market and common mistakes. - Related: [Correlation-Adjusted Sizing](https://learn.tradelabsai.com/risk/correlation-adjusted-sizing/): Correlated positions can turn several small bets into one big one. Learn how correlation adds hidden risk, simple adjustment rules and portfolio methods. - Related: [Concentration Risk](https://learn.tradelabsai.com/risk/concentration-risk/): Concentration risk is the danger of having too much exposure to one asset, sector or idea. Learn how it hides in portfolios, how to measure it and how to limit it. - Related: [Risk, Position, Loss and Drawdown Limits](https://learn.tradelabsai.com/portfolio/risk-limits/): Risk limits turn a risk policy into hard rules on position size, exposure, daily loss and drawdown. Learn how to set them, enforce them and avoid mistakes.